Should investors reconsider US real estate securities?

According to Stonehage Group, US real estate now forms the largest proportion of average high-net-worth client portfolio asset allocation behind equities and fixed income.

John Veale, chief investment officer at Stonehage Group, claims that in many cases client exposure to US real estate is now “almost double that allocated to other alternative investments”.

By this, he refers to gold or commodities, where he says typically no more than 4 per cent of a client’s portfolio is allocated.

Mr Veale adds: “The US housing market suffered after the crash of 2008, as many banks and other lenders shed real estate assets.

“This created excess supply, and it took until early 2012 for inventory levels in many US regions to return to pre-crisis levels. We saw this as an ideal time for clients to invest.”

With these ‘super-rich’ clients already flocking back to the US real estate market, should the wider retail investment market be following suit?

Stephanie Kretz, member of the investment strategy team for private banking at Lombard Odier, certainly thinks so.

“Getting exposed to US residential real estate today is an excellent long-term investment opportunity,” she claims.

“Affordability is 48 per cent above its historical average since 1971, while the US housing price-to-income ratio is largely back to pre-bubble levels and the US housing risk premium close to its historical high.

“Excess supply has started to come down significantly, banks are largely under-exposed and we like real estate as one of the best hedges against potential inflation risks over the long run.”

Steve Shigekawa, managing director and co-portfolio manager for the Neuberger Berman Real Estate Securities fund, who invests in US commercial property as opposed to the retail property market, argues that the search for yield in the current low interest rate environment is driving investors into this asset class.

“In the real estate investment trust (Reit) market the yield is 3.6 per cent today and expectations for dividends for real estate companies are that they will grow roughly 10 per cent by the end of the 2013,” he says.

For retail investors, the prospect of returning to a market that was the driving force behind the credit crisis in 2007 could leave them hesitant.

In spite of the subprime crisis affecting the residential market in its majority, the contagion effect reached home builders, home supply retail outlets, hedge funds held by large institutional investors, and foreign banks.

But there is a case to be made. Year to date, according to Mr Shigekawa, the Reit market is up 4 per cent, and last year it rose by 12 per cent.

He says: “There is an improvement in the real estate market on the commercial side in the sense that occupancy rates are going up, rental rates are going up and that demand for commercial property is being driven by economic growth.”

Risks remain, however, to future economic growth in the US. The National Institute of Economic and Social Research forecasts real GDP growth at 2.1 per cent for the US in 2013 and 2.4 per cent in 2014, but warns that “a more abrupt fiscal adjustment in the US when the March sequestration deadline arrives” could derail that growth.

Simon Laing, head of US equities at Invesco Perpetual, explains: “In spite of a temporary resolution to the immediate fiscal issues, I believe a lack of longer-term action will deter private investment in the US.”

Jenny Lowe is features editor at Investment Adviser